Month: October 2024

I’d like to bring your attention to a recent U.S. Supreme Court decision that could significantly impact your buy-sell agreement if it involves life insurance to redeem shares upon your death.

Impact on Estate Tax

The Supreme Court’s ruling in Connelly established that life insurance proceeds used by a company to redeem a deceased owner’s shares increase the company’s value for estate tax purposes. This could result in a higher estate tax liability than anticipated.

Review Your Buy-Sell Agreement

If your buy-sell agreement uses company-owned life insurance for share redemption, reviewing the structure and terms with your estate planning advisor is crucial. The Connelly decision may require changes to ensure the agreement aligns with your estate planning goals.

Consider Alternative Arrangements

One potential alternative is a cross-purchase agreement, where each owner buys insurance on the others. This structure avoids increasing the company’s value with life insurance proceeds and might better align with your estate planning needs.

Time-Sensitive Considerations

Keep in mind that the current federal estate tax exemption is set to decrease after December 31, 2025. This reduction could further impact your estate planning if your buy-sell agreement is not properly adjusted.

If you want to discuss your buy-sell agreement, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 4, 2024

Here are some important tax strategies for your aircraft operations that could help you overcome passive loss limitations and maximize your deductions.

Understanding Passive Activity Limitations

The IRS’s passive activity loss rules can prevent you from using aircraft-related losses to offset other income. If the tax code classifies your aircraft operations as passive, you may be stuck with unused losses until you dispose of the aircraft or generate passive income in future years.

Avoid Common Traps

Trap 1. Leasing your aircraft in a separate entity. Leasing the aircraft to your business through a separate entity can trigger passive loss rules. However, you can avoid this classification by 

• ensuring the lease qualifies for exceptions (such as short-term leases or providing a flight crew) and 
• demonstrating material participation (e.g., 500 hours of involvement annually).

Trap 2. Leasing to third-party charters. Leasing your aircraft to a third-party charter like NetJets may convert your business asset into a rental asset, subject to passive loss rules. It’s best not to engage in third-party leasing if you want to claim the aircraft losses.

Strategies to Overcome Passive Loss Rules

Material participation. Ensure you meet one of the IRS tests for material participation in your aircraft leasing activity. This can help establish the activity as non-passive, allowing you to deduct the losses.

Grouping election. Consider grouping the aircraft activity with another active business (like your medical practice) to treat both as non-passive. This strategy helps avoid passive loss limitations and allows for deductions, provided the grouping constitutes an appropriate economic unit.

Restrictions for Closely Held C Corporations

If your business is a closely held C corporation, the grouping election does not apply. You must consider other strategies to avoid the passive loss limitations.

As you can see, getting the deductions you want from your aircraft is tricky. If you want to discuss tax strategies for your aircraft operations, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 1, 2024